This page has been archived and commenting is disabled.

Presenting The Fundamental Flaw In The Fed's Thinking

Tyler Durden's picture





 

This one simple chart below shows what is possibly the biggest and most fundamental flaw in Bernanke's approach to spurring the economy, which to him, of course, means rising prices of risky assets, aka the stock market.

The chart above shows the return of two simple things: the return of 4.25% 30 Year Bond issued November 2010... and the S&P.

As is vividly shown on the chart, the return of the long-bond is nearly three times greater than that of the broader equity market in 18 short months!

And therein, ladies and gentlemen, lies the rub.

Recall that Bernanke said something substantively as follows:

"When our policy response lowers interest rates on govt bonds, it induces market participants to take more risk.  Someone selling their govt bond to us may go out and buy a corp bond, thereby lowering spreads. A bank selling their govt bond to us may go out and make a loan..." 

There is one problem with this logic: it is dead wrong. Because instead of forcing investors to rush out of the bond market, which potentially has much more upside embedded (the 30 Year is yielding 2.7% right now: this means the actual price of the 30 Year can continue going up and up and up), investors, even those "sophisticated" ones at banks, hedge funds, and prop desks who can trade CDS, IR Swaps, variance swaps, swaptions, and things the retail investor has never heard of, are doing something else, and something much simpler, entirely.

They are simply front-running the Fed!

The Fed's entire policy of boosting the economy is a failure for many reasons, but the primary purpose embedded therein - to lift stock markets, will forever be subordinated (to use the parlance of our times) to just frontrunning the Fed, which simply means buy whatever the Fed is buy, and sell whatever (if anything) it is selling.

In simpler format:

  1. Frontrun what the Fed has publicly telegraphed to be doing
  2. ...
  3. Profit

And as long as the Fed continues on the course of LSAP, either unsterilized or sterilized ala Twist, this will continue, and the Fed will continue failing upward.

Sadly, this also means that at the end the Fed has only one option: to go Japanese and start buying not only REITs and ETFs, but ultimately individual stocks.

At that point the best purchase, however will not be the stock market, but wheelbarrows.

 


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 06/20/2012 - 15:18 | Link to Comment Vincent Vega
Vincent Vega's picture

FYB!

Wed, 06/20/2012 - 15:28 | Link to Comment nope-1004
nope-1004's picture

The Fed's assumptions on economic outcomes failed miserably.  Which proves that economics is voodoo shit.  The theory doesn't match reality.  And it also shows that the Fed can't examine anything on an independent basis, it refers to history when history never repeats exactly the same.

Benocide is boxed into a corner and he knows it.  Just can't rattle the cage until the election.

 

 

Wed, 06/20/2012 - 15:38 | Link to Comment dlmaniac
dlmaniac's picture

Economy simply cannot be managed.

Looks like the collapse of communism in last century has not taught the world enough a lesson so they are due to get another lesson to learn it again.

Wed, 06/20/2012 - 15:45 | Link to Comment Shameful
Shameful's picture

"What experience and history teach is this — that people and governments never have learned anything from history, or acted on principles deduced from it."

Georg Wilhelm Friedrich Hegel

Mankind cannot and will not learn from the past.  All the mistakes of the past will be repeated over and over again.  We few can learn and profit, but the majority will fumble though.

Wed, 06/20/2012 - 18:41 | Link to Comment 4horse
4horse's picture

these are not mistakes dumfuc

 

and, however shameful, adumbrating hegel mistakes ffilosophy for soffistry, nevermind ffinance, all at which they are expert: you only cogito to summon what they've disseminated and served, sloppy seconds, and only after and put to their thorough ffuckin use

 

otherwise, The Divine Whore, you wouldn't know sophistry from their mata hari, nor atom from adam

 

 

here. find it, otto. your ass from your elbowa footnote like take a global warming to the subject . . .
http://www.theoccidentalobserver.net/articles/MacDonald-Solzhenitsyn-200-Years-Together-18.html

Wed, 06/20/2012 - 19:23 | Link to Comment economics9698
economics9698's picture

This is off topic but does anyone know how you get high on bath salts?  WTF?

Wed, 06/20/2012 - 16:06 | Link to Comment HarryM
HarryM's picture

Maybe not he economy , but certainly the stock market

 

Broke the piggy bank today with the "Market won't be happy" line

Wed, 06/20/2012 - 16:36 | Link to Comment Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

who cares about the bernank?  

 

bitcoin is starting to skyrocket again, and mining reward will drop 50% in 5 months.  

 

Fuck the banking system; fuck the bernank; fuck fiat.

Wed, 06/20/2012 - 16:54 | Link to Comment Paul Atreides
Paul Atreides's picture

How do you use bitcoins when you can't access the internet? or a computer? or electricity?

Wed, 06/20/2012 - 17:06 | Link to Comment Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

Offline transactions are possible.

But the scenario you're describing is unrealistic (worlwide); there is a whole lotta renewable electricity around the globe.  Though oil's fucked; electricity will remain a-ok in many parts of the globe for the foreseeable future

Wed, 06/20/2012 - 18:45 | Link to Comment UP Forester
UP Forester's picture

Two words you may not have come across yet:

Carrington Event

Two more words you may not have seen:

Grid Interconnectivity

 

Wed, 06/20/2012 - 20:53 | Link to Comment Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

Ok mad max, whatever fits your fancy.  I'm also on the yellow brick road, but the fact is that btc has grown 50% in the last 45 days, that it's resilient to a banking holiday, and is extremely scarce at 21M tops.  

 

But you're right, it won't survive the end of the universe, rather unfortunately.

Thu, 06/21/2012 - 03:51 | Link to Comment John_Coltrane
John_Coltrane's picture

Here's an acronyme you grid stability "experts" might want to learn, CME.  That's coronal mass ejection, a massive ejection of plasma from our sun which is presaged by massive sunspot and magnetic activity both of which is set to peak in the next two years.  We'll have about 20 minutes to shut down the entire grid when that huge cloud of charged particles (a plasma) hits and collaspses the earth's magnetic field inducing million volt transients in transformers and blowing them out.  It will take out every energized transformer in the grid, including those used in photovoltaic installations to step up the low DC voltage to 120V AC.  The last big one hit around 1857 and would have taken out the entiro world electical grid had there been one and the last much smaller one (2006?) took out the entire eastern grid (there aren't enough spare transformers to get it up for 6 months to 1 year).

This event has a much higher probability than a major earthquake or meteor hit.  (See this month's Scientific American for more  details)

Wed, 08/08/2012 - 19:21 | Link to Comment unununium
unununium's picture

What the hell are you hoping to buy when there is no internet, or computer, or electricity?

 

Wed, 06/20/2012 - 17:54 | Link to Comment 4horse
4horse's picture

the Fundamental Flaw

FFuck . . .

just when, zh, will the FFed be seen for what it is

 

PNAC2013 at its anniversary, next year? after a 10th decade together with its IRS and ADL doing exactly what it was ffounded ffor

 

Cent'An

Wed, 06/20/2012 - 19:23 | Link to Comment masterinchancery
masterinchancery's picture

It isn't economics, which describes actual behavior; it is just the voodoo shit practiced by Ivy League academics.

Wed, 06/20/2012 - 15:33 | Link to Comment vmromk
vmromk's picture

Obama, why isn't Bernanke in some federal prison already ?

Bernanke makes Madoff look like an amateur.

Wed, 06/20/2012 - 15:44 | Link to Comment Dr. Engali
Dr. Engali's picture

Ummmm........ have you been paying attention? Doess Corzine , Solyndra....fast and furious ring any bells?  Executive privilege man.

Wed, 06/20/2012 - 18:33 | Link to Comment derek_vineyard
derek_vineyard's picture

I actually think bernanke believes in what he's doing and is not profiting personally by trading his decisions.  If I hire an extremist that ruins my business, its not his fault....its my fault.  And now with an OBama vs Romney election we are getting what we deserve for not standing tall or for not leaving the country for a better government or grin and bear it.   Its useless to whine....when 95% of americans want romney or obama.

Wed, 06/20/2012 - 15:39 | Link to Comment vast-dom
vast-dom's picture

ATTENTION: EVERYONE PLEASE COPY AND PASTE THIS ARTICLE, INCLUDING CHART, TO THE FED WITH THE SUBJECT LINE: FEDERAL RESERVE FRAUD COMPLAINT to:

 

consumerhelp@federalreserve.gov

 

PS I have also added this my earlier post to the bottom of email:

 

  • FED SAYS IT IS PREPARED TO TAKE FURTHER ACTION `AS APPROPRIATE -> ILLEGAL
  • FED TWIST EXTENSION TO SWAP $267 BLN OF TREASURIES BY END 2012 -> ILLEGAL
  • FED TO SELL OR REDEEM `EQUAL AMOUNT' DEBT DUE 3 YEARS OR LESS -> ILLEGAL
  • FED TO BUY TREASURIES DUE IN 6 TO 30 YEARS AT `CURRENT PACE' -> ILLEGAL
  • FED SAYS EMPLOYMENT GROWTH `HAS SLOWED' -> ILLEGAL POLICY HAS MADE THINGS WORSE
  • FED SAYS INFLATION HAS DECLINED, REFLECTING OIL -> inflation targeting is illegal according to the Federal Reserve’s mandate.
  • FED REITERATES ECONOMY `EXPANDING MODERATELY' -> ONLY WHEN FED BREAKS THE LAW AND IT IS NOT PRODUCTIVITY EXPANSION; HOPIUM & 1% SUBSIDIES ONLY
  • LACKER DISSENTS FROM FOMC DECISION -> UH HUH

When yours truly began investing in these markets i didn't sign up for TOTAL centrally planned subervsion of now bound, gagged, tied up and brutally (banker/fed) gang-raped markets.

 

Thank you for your prompt attention in this matter.

Wed, 06/20/2012 - 16:21 | Link to Comment Daily Bail
Daily Bail's picture

I wonder how Krugman and Delong feel right now...

Anyone remember Delong calling Bernanke a punk for not putting out an additional $6 trillion in QE...?

 

And You Thought Bernanke Was Bad: Brad Delong Fantasizes About Replacing Him With A $6 Trillion Quantitative Easer

 

---

And here's Fed-loathing James Grant debating Delong on the merits of QE3:

http://dailybail.com/home/video-fed-hating-jim-grant-debates-and-subsequ...

The Keynesian Class is wretching today.

 

Wed, 06/20/2012 - 16:30 | Link to Comment potlatch
potlatch's picture

I do not, personally, mind Keynesianism, except for this crucial current fact: they have yet to be able, to my satisfaction explain, at all, exactly where and what the growth would be, allegedly spurred by their policy preference.

 

Where would the growth be?  You can't point to a city's water system and go: there ya go!

 

That is not the growth that is intended, and they know it, thus they are dishonest to their own theory.

 

At least Gingrich had the integrity to realize: moonbase or bust.

Wed, 06/20/2012 - 17:11 | Link to Comment PaJoad
PaJoad's picture

Uhhhh, did you just use Gingrich & integrity in the same sentence?

Wed, 06/20/2012 - 17:31 | Link to Comment A Lunatic
A Lunatic's picture

Try substituting the words "complete annihilation of the private sector and individual liberty" for "growth". There, see.................

Wed, 06/20/2012 - 19:48 | Link to Comment potlatch
potlatch's picture

and where is the growth in *that*?

 

Everyone has a solution, but no one can say what the solution would actually produce.  They just called it freedom from tyranny?  Come on.

 

What growth?  Where?

 

Moonbase or bust, you'll see

Wed, 06/20/2012 - 16:06 | Link to Comment skepticCarl
skepticCarl's picture

Bernanke is not "Wrong".  He is the JUDGE, so what he says, goes.  Why do ZH'ers continue to be surprised and annoyed at his policies?  They haven't changed, ever, and he keeps telling us that they won't.  It is ridiculous for us to wring our hands and claim "But wait, he's doing it all wrong!".  Just deal with the storm that we can't change:  Go long risk assets, like he is telling us.

Wed, 06/20/2012 - 16:16 | Link to Comment XitSam
XitSam's picture

Agreed. This isn't a flaw, this is the plan! Wake up!

Wed, 06/20/2012 - 17:19 | Link to Comment vast-dom
vast-dom's picture

so much for hope and change. so much for trying to do something about this fuckfest. just play along, huh? i guess you can go back to whoring yourself Carl cause it's just easier that way. maybe you won't get an STD. maybe you'll even learn to enjoy it. LONG APATHY son. And while you're at it SHORT ZH since all that's going down here is futile.

Wed, 06/20/2012 - 17:36 | Link to Comment A Lunatic
A Lunatic's picture

Giving a fuck is so frustrating. I'm tired of knowing the solution.

Wed, 06/20/2012 - 19:41 | Link to Comment 4horse
4horse's picture

moonshot . . .

Giving a fuck __good. otherwise eventually outnumbered, to say the least, presently outgunned as is

monkeysfuckinafootball __bad. I'm tired of knowing the solution __verybad
                                                                                                                seeing through the game
ain't the same as winning it north-dallas forty

 

 

 

verybadthings: ff, fantasy football, making a movie about how yous buried -in fact fucked,dead&buried- some dead pigskin, and . . . it stays in vegas

their ad. their town. their movies. their .001% solution

Wed, 06/20/2012 - 17:23 | Link to Comment Miffed Microbio...
Miffed Microbiologist's picture

I'm too scared to go long risk assets 'cause I'm not sure when he'd pull the rip cord and squish me like a bug. I'm at the point I'm going to keep stacking and praying. All the other herd mates in my sphere are all in and happy with their returns, laughing at me running for the hills.

Miffed:-)

Wed, 06/20/2012 - 17:30 | Link to Comment ejmoosa
ejmoosa's picture

For Bernanke to admit he is wrong would mean he has to refute a lifetime of his academic posturing on how things work.  That ain't happening.

Wed, 06/20/2012 - 17:58 | Link to Comment whatsinaname
whatsinaname's picture

I dont get this - how can they extend Twist until the end of 2012 if they have only 2 months of "stock" to sell of the short term Tres ?

Wed, 06/20/2012 - 23:19 | Link to Comment just a dude
just a dude's picture

They can buy more short maturities when the UST issues them later this year.

Wed, 06/20/2012 - 15:17 | Link to Comment Let them all fail
Let them all fail's picture

Tyler - Have you guys ever tried getting access to the Bernanke's press conference? Or tried to get someone with access to ask your questions?

Wed, 06/20/2012 - 15:22 | Link to Comment HelluvaEngineer
HelluvaEngineer's picture

Unfortunately they have a "Shirts and Shoes" policy.

Wed, 06/20/2012 - 15:28 | Link to Comment bdc63
bdc63's picture

I'm not too far from DC ... I'll go and represent ZeroHedge.  Feel free to submit questions below ...

... wait ... are flip flops okay? ...

Wed, 06/20/2012 - 15:40 | Link to Comment Nothing To See Here
Nothing To See Here's picture

Send in Maxine Waters, she's gonna grill Bernanke real hard

/sarc

Wed, 06/20/2012 - 16:45 | Link to Comment El Oregonian
El Oregonian's picture

"Send in Maxine Waters, she's gonna grill Bernanke real hard"

I think you meant "Thrill" Bernanke real hard. This would be closer to the truth.

Wed, 06/20/2012 - 15:55 | Link to Comment Chaffinch
Chaffinch's picture

The policy-makers will provide the flip-flops

Wed, 06/20/2012 - 15:34 | Link to Comment TJ00
TJ00's picture

So Julian Assange with Ecuadorian diplomatic papers?

Wed, 06/20/2012 - 16:32 | Link to Comment Liquid Courage
Liquid Courage's picture

What? No Pants?

Wed, 06/20/2012 - 15:25 | Link to Comment Village Smithy
Village Smithy's picture

Don't you think that some guy in a dark suit and sunglasses might be inclined to follow the dude with the Zero Hedge ID badge home?

Wed, 06/20/2012 - 15:35 | Link to Comment TJ00
TJ00's picture

Isn't E2 (Escape and Evasion) part of the ZH training?

Wed, 06/20/2012 - 16:03 | Link to Comment BlackholeDivestment
BlackholeDivestment's picture

...Idea. Sneak in a Fight Club Drone (minus the submachine gun, for now, lol) made to look like a Giant Apple with an Ipad open to Skype.

Call it ''TD QE3 2012 El DIAblo''. On the back, have a sticker, ''...first rule of Fight Club is'' and ask away. LMAO.

http://www.youtube.com/watch?v=SNPJMk2fgJU 

...develope a TD 2012 Algo, called NOVA, lol, to ask the questions based on the Forbes Algo Reporter's more human than human reaction to the market algo's. LMAO. 

...please hug a human while you can. Lol. http://www.youtube.com/watch?v=s8TRm4OWhvo

Wed, 06/20/2012 - 17:44 | Link to Comment Revert_Back_to_...
Revert_Back_to_1792_Act's picture

This guy got in and managed to ask some questions.  Ignore the beginning..the interesting part is the Q&A session with Jerry Nelson not the Amero stuff with Bernanke. 

He is surprisingly candid.  You should research some of his answers. 

Three parts

http://www.liveleak.com/view?i=09c_1212482197

http://www.liveleak.com/view?i=f35_1212483744

http://www.liveleak.com/view?i=30a_1212400319

Oh yeah..here is another guy asking the Fed questions.

http://www.youtube.com/watch?v=e5Cp6Me26JA

"Mail it to the Treasury (co-signer)..."

 

 

Wed, 06/20/2012 - 15:19 | Link to Comment Nothing To See Here
Nothing To See Here's picture

WHEELBARROWS FTW!

Wed, 06/20/2012 - 15:34 | Link to Comment reTARD
reTARD's picture

Wheelbarrows are so yesterday! Unlike the days of Weimar when paper was still primarily used, most everything today is electronic. 1's and 0's FTW perhaps?

Wed, 06/20/2012 - 15:41 | Link to Comment Dr. Engali
Dr. Engali's picture

I'm hauling my fiat in the bed of my gas guzzling pick up truck.

Wed, 06/20/2012 - 15:56 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

I'll need an extra thumbdrive just to hold all my zeroes!

Wed, 06/20/2012 - 15:20 | Link to Comment Shameful
Shameful's picture

Does any rational, thinking person think that the US Gov is good for the money 30 years out at a 2.7% coupon?  I can't come up with a scenario where such an investment is wise as a buy and hold short of either aliens showing up to give us free tech and/or ultra cheap and portable fusion power.  It's a given that the gov will only ramp us spending so the only way for it to be a money good long term investment is shocking unbelievable growth rates, which I'm just not seeing short of a miracle power source.  Buy as a trade, sure I get that, for those smart enough to be one of the first guys out of the door when the stampede starts.

Wed, 06/20/2012 - 15:23 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

Long term bonds only for the nimble.

Wed, 06/20/2012 - 15:24 | Link to Comment LawsofPhysics
LawsofPhysics's picture

+1000... because interest rates can never rise again and price discovery can never be allowed to happen.  hence "markets" are dead.

Wed, 06/20/2012 - 15:30 | Link to Comment resurger
resurger's picture

Yes, they might as well create a new website:

www.zerofed.gov

"On a long enought timeline the interest rate for everybond drops to zero" or NIR

Wed, 06/20/2012 - 15:35 | Link to Comment Shameful
Shameful's picture

Waiting for it, that would actually make our political class correct "We are wealthier the more debt we have!  It pays itself off, they are paying us for the privilege of having us spend their money"  Hopefully soon their after the gov can stop all taxation and exist solely on negative interest rate loans.  I expect donuts and skittles to rain from the sky and unicorns to replace cars as the main form of transportation at that point as well.

Wed, 06/20/2012 - 15:27 | Link to Comment devo
devo's picture

Of course not, but if there is demand the price will go up. The FED is the lone man at the table, but it has a voracious appetite.

Wed, 06/20/2012 - 15:31 | Link to Comment Shameful
Shameful's picture

I've long held that the Fed can peg interest rates wherever it likes simply by being the market.  Problem is doesn't make it a winning trade to be long when they are gobbling it up, as they have to blowtorch the dollar to do it.  Kind of like bombing the village to save it.  Now I don't think the Fed is the whole of the market now, but it is a big player.  Still have huge pools of capital looking for safety, and the bond market is if nothing else a very liquid place to camp out for a while.  It's an odd situation where more economic uncertainty makes bonds more attractive, till it doesn't.  When things are so laughably bad that private investors dump out to change what is perceived as being safe.

Wed, 06/20/2012 - 15:44 | Link to Comment devo
devo's picture

I don't think anyone believes bonds are safe. I think they're trading them short term with the intention of selling them back to the Fed well before maturity. The yields don't matter. Prices increase because there's a voracious buyer (the Fed). It's a clear distortion (if not bubble), but it has to last a long long time. The market is broken.

This is probably why gold hasn't skyrocketed, too. There's a lot of money tied up in these trades. Rising interest rates on bonds = good for gold.

Wed, 06/20/2012 - 15:48 | Link to Comment ATM
ATM's picture

It does not have to last a long time. It CAN last a long time but just as assuredly it can last a very short time.

The lynch pin is confidence. when confidence in the system/monetary unit/issuer fails, it doesn't fails slowly it fails all at once.

As long as TPTB can hold the public confidence the game can be played. As soon as confidence collapses everything is in the shitter.

Wed, 06/20/2012 - 15:59 | Link to Comment Shameful
Shameful's picture

I randomly hear people in other departments discussing hyperinflation, and speculating how we would continue operations.  Naturally this talk scares me to death as it shows we are closer to the precipice then I would like.  I'm waiting to hear about it in the grocery line, or from my sister to know it's really time to panic.

Wed, 06/20/2012 - 16:06 | Link to Comment CommunityStandard
CommunityStandard's picture

The majority of people only react.  You won't hear people talking about it until it's happening.

Wed, 06/20/2012 - 15:27 | Link to Comment Dr. Engali
Dr. Engali's picture

What if the Euro collapses and the dollar has a big rally? There would be some pretty powerful deflationary forces then.

Wed, 06/20/2012 - 15:32 | Link to Comment Shameful
Shameful's picture

Yes it would, for what a year, two, five?  If you are intimating that the Euro blowing up will send us into a 30 year global deflationary tailspin that not even the profligate Fed and Fed Gov can spend their way out of...that point I would disagree.  I don't doubt that there is money to be made trading the long bond, just in holding it the whole time and clipping the coupon.

Wed, 06/20/2012 - 15:36 | Link to Comment Dr. Engali
Dr. Engali's picture

No... I don't think there will be a 30 year deflationary spiral. Quite frankly I think there will be a big bloody nasty war before that time. But I do think bonds are pricing in a currency shock.

Wed, 06/20/2012 - 15:48 | Link to Comment Shameful
Shameful's picture

Oh on that I would totally agree.  War at this point is baked into the cake.  To many guilty parties that need a distraction and to large a war industry.  My whole point is no one would actually want the long bond to hold.  All that means is it's a known ponzi and just would be looking for a good entry/exit point.

Wed, 06/20/2012 - 15:41 | Link to Comment bdc63
bdc63's picture

Any currency that could show a firewall against Euro contagion would rally ... I'm pretty sure we don't have one of those ...

Wed, 06/20/2012 - 15:45 | Link to Comment Dr. Engali
Dr. Engali's picture

Have you been paying attention to the dollar Euro lately?

Wed, 06/20/2012 - 16:01 | Link to Comment PeeTee
PeeTee's picture

I'd buy US 30yr bonds any day...

 

 

... if I get a free Spiderman towel to go with it. :p

Wed, 06/20/2012 - 17:32 | Link to Comment ejmoosa
ejmoosa's picture

You mean will the youth of today be making enough money to pay off the rest of the world when these debts come due?

 

If I was one of them I would say HELL NO!

Wed, 06/20/2012 - 15:24 | Link to Comment falak pema
falak pema's picture

operation twist and the dollar goes up! Wow, how FED can influence the FX market. From 1.2704 to 1.2656.

Wed, 06/20/2012 - 15:22 | Link to Comment jack stephan
jack stephan's picture

13 is the death card, Dimon and Bernanke are covered in it. 

http://vimeo.com/3037251

Wed, 06/20/2012 - 15:21 | Link to Comment LawsofPhysics
LawsofPhysics's picture

While true, I'd argue that the Fed knows this is what is happening and it is intentional.  Think what would happen if those short term interest rate start to climb.  The debt addicts are all dead.  Every good dealer knows that you don't have any customers if you kill them all.

There are no markets, only addicts and dealers.

Wed, 06/20/2012 - 15:22 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Antal Fekete has long written that speculation in bonds, a symptom of forcing declining interests rates down, destroys capital.  And how vigorous has the recovery been?  Even with stimuli, QEs and Twists.

Wed, 06/20/2012 - 15:32 | Link to Comment nope-1004
nope-1004's picture

Correct.  Low rates stimulate NOTHING, except other areas of the economy where rational investors look for a return.  So commodities rise in price, which causes input costs for businesses to rise, which causes businesses to layoff or shut down, which destroys what capital is meant to be used for:  Production.

The FED are idiots.  I'm convinced.

 

Wed, 06/20/2012 - 16:23 | Link to Comment ITrustMyGut
ITrustMyGut's picture

NOT Idiots..

PURPOSEFUL

this isnt accidental destruction friend....

 

end ot the west... introducing the new global digital currency.. asian managed.. asset backed... no FRN's, EUR's etc... just global digital shiite...

 

PURPOSEFUL.

Wed, 06/20/2012 - 16:48 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

I've read that industry in Weimar Germany thrived on low interest rates, increasing capital expenditure within Germany by expanding plants and buying tools while simultaneously booking revenues in foreign accounts in order to dodge tax increases intended to cull the profits that said enterprises were reaping as a result of the ever-cheapening labor (never heard of that!).  Businesses had no other means of insuring that the cash piles they were sitting on (never heard of that!) wouldn't suddenly become either worthless (indicating a failure to capitalize upon inflation) or too valuable (in which case consumers would not spend it on their goods).

It was during that time of factory expansion and investment that the vaunted "Nazi war machine" was tooled, oiled, and prepped, however, it wasn't the "Nazi war machine" yet.  The nation's economy was largely run by a cabal of bankers, complicit industrialists, and labor unions (never heard of that!). 

Say, Roger Clemens beat the rap!!  Can you believe it?!

Wed, 06/20/2012 - 16:52 | Link to Comment AnAnonymous
AnAnonymous's picture

The nation's economy was largely run by a cabal of bankers, complicit industrialists, and labor unions (never heard of that!).

______________

So it was run by the German people.

Wed, 06/20/2012 - 17:17 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

There used to be a middle class, is my point.  I've never heard of a middle class getting squeezed.

Weimar, hear we come. 

Expect assassinations.

Wed, 06/20/2012 - 17:40 | Link to Comment Poor Grogman
Poor Grogman's picture

Free Tibet!

Wed, 06/20/2012 - 17:35 | Link to Comment ejmoosa
ejmoosa's picture

Low rates reward consumers and punish savers, the source of capital needed for real economic expansion.  And what happens when consumers don't swallow the bait?  

Panic ensues...

 

Wed, 06/20/2012 - 18:31 | Link to Comment SAT 800
SAT 800's picture

Collapse ensues. Economic collapse.

Wed, 06/20/2012 - 18:28 | Link to Comment SAT 800
SAT 800's picture

Just expanding on your statement a little. Prof. Antal Fekete has a website and you can go there and read articles under the banner popular economics which explain, correctly; for a miracle, how the gold standard works, and many other very clear and desirable pieces of knowledge.

Wed, 06/20/2012 - 15:22 | Link to Comment bnbdnb
bnbdnb's picture

About to hit rock-bottom, better pull out the bulldozers.

Wed, 06/20/2012 - 15:22 | Link to Comment fonzannoon
fonzannoon's picture

Ben also made it clear he believes it is stock and not flow that counts. Whatever all that means..

Wed, 06/20/2012 - 15:24 | Link to Comment Let them all fail
Let them all fail's picture

I believe you have them mixed up with the underpants gnomes...if only they had their own gnome federal reserve to frontrun

Wed, 06/20/2012 - 15:28 | Link to Comment Dr. Engali
Dr. Engali's picture

I think the question that you have to ask yourself is.. do you really  believe that is the fed's goal? Or is the fed's real goal to keep the government's borrowing cost down by announcing what their actions will be precisely so that everybody does front run the fed?  I think they are getting exactly what they want. The equity clowns keep hoping that the fed prints prints prints so there is no significant market sell off and uncle same gets to borrow for almost nothing.

Wed, 06/20/2012 - 15:34 | Link to Comment fonzannoon
fonzannoon's picture

I think the bigger point is the same people who keep fking things up are left in charge. To think that they won't fk them up again (probably sooner than later) is a big mistake. You can pretty much set your watch by it.

Wed, 06/20/2012 - 16:36 | Link to Comment Village Smithy
Village Smithy's picture

You make a good point. If he realizes that a slow and painful wind down is inevitable then just keeping us from paying Spanish interest rates is about all he can do. Albeit temporarily.

Wed, 06/20/2012 - 15:53 | Link to Comment Vinz Klortho
Vinz Klortho's picture

Herr Doktor I agree.

I think the Fed's mandates are:

1) Save the banks from themselves whenever necessary, doing whatever is necessary

2) Allow the government to fund itself with borrowed money at an affordable rate

Unfortunately, the more debt is added, the lower the rate must be to keep it affordable, so low interest rates for the forseeable future is what we will have!

Seems like they are implementing their mandate perfectly.  Price stability and full employment, not so much.

Vinz

Wed, 06/20/2012 - 16:01 | Link to Comment Ghordius
Ghordius's picture

Del

Wed, 06/20/2012 - 15:25 | Link to Comment Confundido
Confundido's picture

Does anyone still think that QE is about the "recovery"? This is simply the monetization of fiscal deficits. That's it! Nothing else! Who cares abt unemployment rate or GDP or housing? Nobody.

Wed, 06/20/2012 - 15:30 | Link to Comment John Law Lives
John Law Lives's picture

Worse still, Chairsatan has openly discouraged deep Congressional spending cuts at this time.  Chairsatan is more than happy to keep monetizing new debt whilst crushing the value of the currency.

Chairsatan = One rotten SOB

Wed, 06/20/2012 - 15:26 | Link to Comment resurger
resurger's picture

If it keeps on going up and up and up, so that will lower their duration, and we might as well end up seeing a negative interest rates on 30 years ....

Wed, 06/20/2012 - 15:41 | Link to Comment LawsofPhysics
LawsofPhysics's picture

correct, literally forcing bond holders and retirees to, in essence, begin paying off the debt.  Clever bastards.

Wed, 06/20/2012 - 16:02 | Link to Comment strangeglove
strangeglove's picture

With what income?

Wed, 06/20/2012 - 16:20 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Not very quick are you?  Do you not understand what negative means?  Think about it.  If you are a retiree and your portfolio is in treasuries that have negative interest rates, then you are paying the government to hold your money.  That is the whole fucking point, if you are retired, you don't have income.  You are depending on a return  from you life savings and investments. This is the fundamental problem with ZIRP, WTF dude?!?!?

Wed, 06/20/2012 - 15:27 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The Flaw:

You can print away your problems.

Wed, 06/20/2012 - 15:30 | Link to Comment Tyler Durden
Tyler Durden's picture

That's the strategy.

This is more about tactics.

Wed, 06/20/2012 - 16:24 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The chief tactic is to confuse the rational consumer.  Get the people throwing money in one direction, stop them out, get them to give their rights to the money masters, and then kick the can down the road.

It is simple - the market will be manipulated longer than you can stay solvent; in paper terms anyway.

Wed, 06/20/2012 - 16:30 | Link to Comment WezTheJuic
WezTheJuic's picture

Yes.  It is what it is.  And it is being applied on so many fronts. 

Starting to see some prep-work for a "pull-back", and see what sticks.  Because TPTB know they have gone too far.  Call it the final push for a "check-mate" or a "check and see".

S.E.P.E.S.

Social.

Economic.

Political.

Evolution and/or Evilution.

Species.

 

It is what it is.

 

Cheers,

 

Pens,

Wed, 06/20/2012 - 16:20 | Link to Comment earleflorida
earleflorida's picture

Indeed, and you can quickly euthanize any or all desenters through austerity?    http://www.infowars.com/top-uk-doctors-chilling-claim-the-nhs-kills-off-...

Coming to a country near you, nice!

Ps. This practice has been going on for awhile in the U.S., but has been escalating exponentially this last decade.  

Thu, 06/21/2012 - 04:27 | Link to Comment falak pema
falak pema's picture

the Flaw : as the FED reaches the asymptote of its strategy, it runs out of ammo and the swings on roller coaster become wider n wider as central control does not produce results and the return on twist or easing is marginal and the intervention has to become more n more specific, aka on troubled assets. Then we will be in the red zone. the money velocity will hit high and hyperinflation will become visible and increase in FED rates inevitabe. End of ZIrp! And then the unwind begins as the market will be unsustainable. Incidently, the derivatives markets and commodity bets will go sour and that will put a strain on the US banks, hidden today under the carpet. Interest rates up or USD up are both killers to WS levitation, ultimate aim for FED along with inflation deleveraging of debt.

And mark my word! Its then that Merkel will put the foot on the accelerator and the Germans will turn the monetary table on Anglo zone! Its all a question of timing, and time is possibly on Merkel's side if she makes the right play on ECB and firewall interim play, crucial decision of this week and next, allowing her to clean Greek mess and halt contagion that only the FED can then fire up or douse at its discretion. I bet that it will douse it and thus increase fragility of USD sustainance...We will be in end 2012 or in 2013 when the next potus will face the fiscal wall...KAIROS MOMENT...I WILL PUT MY HAND ON THE FIRE.

I sound more and more like a mayan.

Wed, 06/20/2012 - 15:28 | Link to Comment John Law Lives
John Law Lives's picture

"Sadly, this also means that at the end the Fed has only one option: to go Japanese and start buying not only REITs and ETFs, but ultimately individual stocks."

If this is the Fed's ultimate course of action and there is no upper limit to the size of the Fed's balance sheet, why should they bother to pretend to care right now how big it gets?

Wed, 06/20/2012 - 15:41 | Link to Comment Matt
Matt's picture

You don't go all-in this early in the game. They have to save stuff for later, so they can boost the market. If the market always knows what's coming, it will always be priced in, in advance.

Wed, 06/20/2012 - 15:57 | Link to Comment John Law Lives
John Law Lives's picture

I realize that, but Chairsatan had no apparent reservations re. broadcasting his support for near-ZIRP well into the future.  I don't know why the Fed should bother to pretend it actually cares about the size of its balance sheet.

Wed, 06/20/2012 - 15:29 | Link to Comment Everybodys All ...
Everybodys All American's picture

Brilliant ... Tyler you continue to impress.

Wed, 06/20/2012 - 15:29 | Link to Comment geewhiz190
geewhiz190's picture

no worries, the VIX is down

Wed, 06/20/2012 - 15:30 | Link to Comment RobotTrader
RobotTrader's picture

Wow, the bond market rally continues.

 

Bond paper is king, even when compared to stocks.

Wed, 06/20/2012 - 15:43 | Link to Comment bdc63
bdc63's picture

RobotTrader!  Nice of you to stop by.

Yesterday you said if QE didn't happen today, that there would be a HUGE rally.  Care to explain how you got that wrong?

Wed, 06/20/2012 - 15:48 | Link to Comment RobotTrader
RobotTrader's picture

I said no QE needed because we have already had a huge rally.

 

Where's the recession?

I don't see it.

Wed, 06/20/2012 - 15:58 | Link to Comment LawsofPhysics
LawsofPhysics's picture

ZIRP a derp. Because it has worked out so well for Japan.  You don't see much Robo, a least not until it has already happened.

Wed, 06/20/2012 - 16:07 | Link to Comment CvlDobd
CvlDobd's picture

Holy shit! Robo responded to an inquiry! That alone deserves an up vote. Let me be the first.

Wed, 06/20/2012 - 16:15 | Link to Comment Dr. Engali
Dr. Engali's picture

I don't think that's the real Robo.... He has not been following his normal behavior patterns. So he is either a phoney or he got his first taste of pussy.

Wed, 06/20/2012 - 15:59 | Link to Comment Dr. Engali
Dr. Engali's picture

You really should venture out from your mom's basement. That way you can see the depression in it's full glory.

Wed, 06/20/2012 - 16:09 | Link to Comment kito
kito's picture

robo received one of those govt issued complimentary beer/economy goggles that came with his 10 year bond........the goggles are great....put them on and merkel looks hot.....and the u.s. economy is smoking..........

Wed, 06/20/2012 - 16:05 | Link to Comment GMadScientist
GMadScientist's picture

LOL...it's on Main St.

imaginary GDP of 2% (check the revisions into sub-1% land though), UE > 8% (but more like 16% if you count underemployment), housing re-re-dipping, every tax base from muni to the Fed diving, and you "don't see it".

We could end the energy crisis if we could just harvest the power of the things you "don't see".

Enjoy your eroding earnings and phantom "wealth", idjit.

Wed, 06/20/2012 - 16:16 | Link to Comment falak pema
falak pema's picture

hidden in the sand dunes of your avatar pic! 

Wed, 06/20/2012 - 16:24 | Link to Comment Mugatu
Mugatu's picture

Robo's right - all the booming times in the past were also associated with record unemployment.  People without jobs tend to spend more money during the day on things like water parks, movies, and porn!  That's all very bullish. 

Wed, 06/20/2012 - 18:07 | Link to Comment post turtle saver
post turtle saver's picture

Let me swipe it on my EBT...

Wed, 06/20/2012 - 16:45 | Link to Comment Robot Trader's ...
Robot Trader's brother's picture

He quit taking the meds ..........again.........

 

Wed, 06/20/2012 - 15:44 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Yes, and those who actually hold  the bonds will pay off the debt with negative interest rates.  Better get those retirees some more cat food.

Wed, 06/20/2012 - 15:30 | Link to Comment carbonmutant
carbonmutant's picture

Bernanke said the gating factor on whether or not we get more QE was the Unemployment numbers. So this appears to be his highest priority. Which I assume is being driven by pressure from the WH.

Wed, 06/20/2012 - 15:54 | Link to Comment SovereignSilver
SovereignSilver's picture

But employment is looking good when you don't count people out of work for over a year. If that's the plan it's all good! Nothing to worry about. Move along now.

Wed, 06/20/2012 - 18:04 | Link to Comment ejmoosa
ejmoosa's picture

It's too late to turn around employment this year.  And listening to Bernanke speak, he does not even grasp why companies hire.

His estimates for unemployment this year and next are way off the mark.

 

 

Wed, 06/20/2012 - 15:33 | Link to Comment sharky2003
sharky2003's picture

With all this bond buying, how much do rates have to rise before the fed is underwater?

Wed, 06/20/2012 - 15:51 | Link to Comment HelluvaEngineer
HelluvaEngineer's picture

Haha.  You said "before" they are underwater!

Wed, 06/20/2012 - 15:34 | Link to Comment davinci7_gis
davinci7_gis's picture

Hell, I have been frontrunning the FED for about 4 months now...and I am a layman investor.  God, to think how long and to what extent the pros have been doing it blows the mind!

Wed, 06/20/2012 - 15:40 | Link to Comment davinci7_gis
davinci7_gis's picture

"Sadly, this also means that at the end the Fed has only one option: to go Japanese and start buying not only REITs and ETFs, but ultimately individual stocks.

At that point the best purchase, however will not be the stock market, but wheelbarrows."

 

Don't worry about the fact that there is alot of M2...when the "velocity" of the money starts cranking up (if it ever does)..then the FED will raise interest rates...and that's when you want to be in TBT...right? :)

Wed, 06/20/2012 - 15:57 | Link to Comment davinci7_gis
davinci7_gis's picture

Bill Gross (Pimco) is going to have a hell of a bonus this year!

Wed, 06/20/2012 - 16:15 | Link to Comment davinci7_gis
davinci7_gis's picture

I think I just saw Bill Gross click the "green triangle" on the post above!

Wed, 06/20/2012 - 15:35 | Link to Comment Snakeeyes
Snakeeyes's picture

A bigger flaw is M2 Money Velocity is the lowest it has ever been! Back to 1959 levels under Ike!!!!!!!!!!!!!!!

Seriously, look at the chart of M2 Money Velocity (GDP/m2)

http://confoundedinterest.wordpress.com/2012/06/20/will-bernanke-twist-a...

Wed, 06/20/2012 - 16:06 | Link to Comment davinci7_gis
davinci7_gis's picture

You are totally right snakeeyes...and when the velocity starts to go up, it will skyrocket up.  The only good thing is that we are living at a time when we have mass media all they way down to individual level with cell phones.  Thus, the FED can make an interest rate increase announcement and it will "hopefully" take effect within hours and "hopefully" sweep alot of cash into the banks within weeks.

The only thing about it is..this model will work as long as the velocity doesn't get out of hand to fast...there is a point at which no amount of rate increases will keep people from pulling all their money out of banks (because they have lost faith in the value of the dollar as a medium of echange).....and they pour their dollars into GOLD!!!

I have hedged my bets both ways...TBT for rate increases and GOLD for the nuclear possibility.

 

Wed, 06/20/2012 - 16:14 | Link to Comment PhattyBuoy
PhattyBuoy's picture

FYB  

Wed, 06/20/2012 - 16:32 | Link to Comment falak pema
falak pema's picture

yes, but....money velocity is a symptom, and the cause is complex...try and find it! 

Wed, 06/20/2012 - 15:35 | Link to Comment FlyoverCountryS...
FlyoverCountrySchmuck's picture

"OHHH... Let's TWIST AGAIN! , like we did last summer.

Let's TWIST AGAIN, TWIST'en time is here...."

Wed, 06/20/2012 - 15:36 | Link to Comment Conman
Conman's picture

Stophunt continues? Those steps down look aweful algoish to me.

Wed, 06/20/2012 - 15:37 | Link to Comment fonzannoon
fonzannoon's picture

As long as the mice continue to run around thinking there is a way out of the maze this will go on and on. If they ever realize there is no exit it will get interesting. People are getting there. Right about now they know enough to know that there always seems to have to be a program in place for the markets to exist. Even though they have no idea what the programs really are, Sooner or later they will see that this is just theatre and buying time. When they understand the reality of it that will be quite a moment in time.

Wed, 06/20/2012 - 17:15 | Link to Comment grid-b-gone
grid-b-gone's picture

That's exactly how you keep 'em looking for the helicopter.

Wed, 06/20/2012 - 15:45 | Link to Comment Winston Smith 2009
Winston Smith 2009's picture

The "fundamental flaw" with all Fed actions is due entirely to their use of a laughably simplistic economic model fed with data (CPI, etc.) that is manipulated for political reasons.  Garbage data into garbage model = insane garbage out.  And yet they try to run the world with this crap!  People wonder why their actions are so obviously stupid.  Simple, they are the dogmatic high priests of the pseudo-science called economics who have an unshakable, religious faith in their economic models, just as other priests once believed that the sun revolved around the earth.

Wed, 06/20/2012 - 15:39 | Link to Comment fonzannoon
fonzannoon's picture

My question is this....at this rate the fed will have zero short term bonds and trillions of long dated paper. Can the fed hold all this 30yr paper till maturity or will they eventually have to sell and send rates rocketing?

Wed, 06/20/2012 - 15:41 | Link to Comment Al Huxley
Al Huxley's picture

They make up stories, but really its all about keeping rates down, because any rise makes the unsustainability of the US budget debt and deficit so glaringly obvious that it becomes impossible to ignore.  Everything else is noise and side effects.

Wed, 06/20/2012 - 15:42 | Link to Comment marketcycles79
marketcycles79's picture

it's all about X patterns.
special member market updates on $spx, $indu, $rut.

 

http://humblestudent777.blogspot.com/

Wed, 06/20/2012 - 15:44 | Link to Comment john_connor
john_connor's picture

"This is the end, my only friend, the end." - Jim Morrison

Wed, 06/20/2012 - 16:17 | Link to Comment davinci7_gis
davinci7_gis's picture

Probably at the beginning of the end right now....

Wed, 06/20/2012 - 15:45 | Link to Comment kevinearick
kevinearick's picture

Egypt: The Pharaoh & The Tailor’s Kid

Do you remember that episode where the little bug projects itself to be a big monster, and gets the populants to kill each other out of allegiance and fear? That’s Chicago Business, Tammany Hall, Obama, and the United States.

The problem for the underlings, the “new” China, Russia, Germany, ad infinitum, is that they are jockeying to be the replacement with a cheap replicate projector, which is why you hear the false assumption echoing in the background with increasing frequency: the US has the largest consumer base, and, in an empire of import/export co-dependence, that is what counts.

Yes, the statement is correct, but it only applies within the empire, from which all real investors have emigrated, and, as History attests, they do not re-incorporate under the FLAG of sunk cost empires. That would be stupid.

At the end of the day, which is quickly approaching in relative terms, somebody with a clue has to do, and all the consumption addicts get paid to talk, in a buy-what-we-tell-you-to-buy and we-will-promote-you-to-make-payments-on-the-debt, ponzi credit economy. Real labor, which is always working on the next bridge, except to watch the sh-show on its breaks, is going to determine the outcome, like it always does, but…prove me wrong.

It’s a MAD world, the empire, which is what you should expect when lawful passive aggressives lead unlawful aggressive ignorants around by the nose, all of which can only see their own puffed up, artificial demand forward, projection, isolating you. Quantum change occurs when the false assumptions in one dimension collapse, revealing another dimension, readied for the occasion.

Accelerate time, when all the robots have taken up residence on the bridge, over the DNA churn pool. Empires are built to be destroyed. We now return you to the broadcast, IN PROGRESS, new empire same as the old empire, with a new dress. Make-up!

Sometimes you wear a dead man’s pants, until you learn to tailor a suit for yourself. That’s life, a blessing, not a curse, for those who seek it. Do your part and allow space for others to do their part. Make yourself and your community, and everything else will take care of itself. Some people’s money is worth more than others.

Remember when you could work on your own car and everyone customized their own? Think about the effect of infrastructure. Jump the computer, by overloading the bridge, and look forward.

Just because the previous generation paid down all its wealth to busy itself talking and pushing paper doesn’t mean that you must. Let them argue and go about your business. It will pay off, usually when you least expect it. That’s the nature of the unknown.

You don’t need a missile to take out the drone bees. Take the Queen off the board, refashion her, and place her back on the throne. The Queen is not the one with the crown warming the seat; it’s the pawn you escort to the prom. It’s a chess game of chess games. That’s all you need to know to build a fusion/fission reactor.

Kids drop out when they reach their consumption interest. What’s so difficult to understand? What kind of kid wants an android for a parent?

The empire is constantly programming your subconscious. Put it to work yourself. Make sure it always has a problem to solve. The enemy of the enemy is your friend. The empire breeds fear, anxiety, which is a social, not an individual, State of Mind. Let the robots misdirect themselves. Gravity is not a scarce commodity in the universe. You are.

The point of the Internet was to let everyone, who wanted a seat, see the sh-show for what it is. The uniform makes the empire, not the man or woman. Now, get back to work, tailor your own suit, and build the next bridge out.

All the Fed can do is wait for death rate recognition, the President’s only card is entitlement growth, Congress is lost in space, and the Supreme Court is locked up on Family Law, all embedded, courtesy of the robot scientists at DoD, from which the reserve currency empire bet derives. Wake me up after the war over non-performing assets, once the mob gets tired of looking from the outside, into empty promises on every event horizon, inflated by ponzi politburo pension promises, which cannot be kept.

Get on the elevator kid. Let’s see the universe. Where are we going? Where do you want to go? Push a button and let gravity do the rest.

Wed, 06/20/2012 - 17:11 | Link to Comment grid-b-gone
grid-b-gone's picture

Wow. I think I've got a little ADD and usually understand a good ramble, but this one lost me.

Wed, 06/20/2012 - 15:45 | Link to Comment HaroldWang
HaroldWang's picture

SPX tested 50 dma twice and bounced. Ben says, "Don't worry, we got your backs." You have no choice but to sit it out or go long. I'll go with the Fed on this one and continue going long.

Wed, 06/20/2012 - 15:48 | Link to Comment midgetrannyporn
midgetrannyporn's picture

they buy treasuries = banker bonuses

they buy stocks = more banker bonuses

everything else is just b.s.

Wed, 06/20/2012 - 15:54 | Link to Comment LMAOLORI
Do NOT follow this link or you will be banned from the site!